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- 1). Understand the scope of limited liability in your jurisdiction. Every state has different laws pertaining to the limitation of liability. Limitation of liability provisions in a framework agreement may be valid in some states and not valid in others. Furthermore, a limitation of liability clause will generally not protect against liability for intentional misconduct or for losses to third parties. Even if both companies are limited liability companies, failing to understand the scope of limited liability in your jurisdiction can result in severe and unanticipated losses.
- 2). Use a reasonable liquidated damages clause. A liquidated damages clause fixes the amount of damages for an aggrieved party to collect if there is a breach of the framework agreement. Liquidated damages clauses typically fix the amount of damages as an amount per day. Courts will generally only enforce a liquidated damages clause if the clause is fair and if damages were uncertain at the time of contract formation.
- 3). Use an arbitration clause. An arbitration clause requires both parties to go through the arbitration process (either binding or non-binding) before proceeding with a lawsuit. The arbitration process can serve to reduce the costs of litigation and avoid potentially costly jury verdicts.
- 4). Avoid personal guarantees for contracts/indemnification clauses. One common error made by small business owners is to personally guarantee debts. For instance, if a supplier were to refuse to ship to a manufacturer because of concerns about the stability of the manufacturer, the owner of the manufacturer may try to secure shipment by personally guaranteeing to pay any shortfall. The act of personally guaranteeing a debt circumvents any limitation on liability.
- 5). Be specific as to further contracts. A carefully drafted framework agreement can be circumvented if the purchases under the framework agreement (call-offs) are made using standard forms containing language limiting liability that differs from the framework agreement. The result is a confusing hodge-podge of ambiguous contractual language that can only be solved through extensive litigation. Once you have a framework agreement, have your lawyer draft purchasing forms consistent with the framework agreement.
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